What is Offshore Outsourcing: Definition and Benefits

Nowadays, it’s as if the world has become one big village. Without much hassle, you can communicate and work with people from around the globe. Some say it’s a good thing. Others condemn it. But whether we like it or not, offshore outsourcing is here to stay. Should you be considering it for your business? We look at the topic – what it is, what it entails, and why so many companies are adopting offshore outsourcing as part of their business model.

What is Offshore Outsourcing?

You’ve heard a LOT about outsourcing in the recent years. It’s been a topic of great controversy, some praising it for the countless benefits it provides, others condemning for taking jobs away from home.

Offshore outsourcing, specifically, is guilty of this. On one hand, it provides a lot more value – paying significantly cheaper for the same amount of work. On the other, though, it’s bad for the employees of the company, as they can’t compete with outsourced labor in terms of pricing.

There are 2 alternatives to offshoring:

Nearshore Outsourcing – Meaning, working with companies that are close to you in terms of location. This comes with the benefits of offshoring in terms of price, without the drawbacks of working with a company on the other side of the world.

Onshore Outsourcing – Contracting companies located in the same country. With onshoring, you tend to save significantly less than nearshoring or offshoring, but you make up for it with better output.

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Benefits of General Outsourcing

What do companies hope to gain from outsourcing? It’s reasonably clear that they will reap the benefits that have made outsourcing a big buzzword in the business community. So, let’s start there. Why do companies choose to outsource?

Reduce Capital Costs

Every department and every employee in your organization implies a capital cost. You need facilities, equipment, and of course, the staff that occupies that space and uses that equipment. Outsourcing makes the provision of workspace, equipment, and human capital somebody else’s problem.

Turn Fixed Costs into Variable Costs

There are two ways to increase profits, and most businesses try to implement them both. To improve profit, you can try to increase turnover, but as any business owner knows, that’s easier said than done.

Apart from the problem of finding new clients or persuading old ones to buy more, increased turnover implies increased capacity. And building capacity costs money. You got an order for a million units. That’s great! Now you have to build a factory to manufacture that.

Another approach is to look at costs and find ways to cut them. Fixed costs are a good place to start. These costs are the ones you incur to keep your doors open. And as the name implies, they remain an expense regardless of how much business you do. Rental, water and electricity, and wages are all fixed costs.

When you outsource, you only pay for outputs. During quiet times, you can reduce the cost of the product or service. After all, you won’t be using it as much as you otherwise would. On the other hand, if you do the work in-house, you have all the costs of providing for staff, facilities, and equipment whether you are using them to the full or not.

Invest More in Revenue-Earning Activities

Support functions are necessary to any business. But they don’t make money. Instead, they make it possible to make money. The money you spend on support functions isn’t an investment. It’s a straightforward expense.

If you can find an organization that will take over these support functions, you often pay less. They will usually have several clients who are using their service, and that means you benefit from economies of scale.

This makes support functions a prime target for outsourcing. Provided you can source them for less than they’d cost in-house, you can expect to have more money to spend on the activities that generate revenue.

Increase Efficiency

When an activity falls outside your core business, you may find yourself or your employees trying to multitask. For example, a manager becomes a marketer – but just what does he or she know about marketing? You and your employee face a learning curve, and learning curves are inefficient.

Outsourcing gets you access to expertise – and since the task you pass on to them is the core business of the organizations to which you outsource, they’re always on top of the game. There’s no wait time or down-prioritizing. They want to get the job done even more than you do!

Cut Labor Costs

If you’re not into trying to multi-task a function, you have to employ specialized staff. They don’t come cheap. Alternatively, you could be looking at a fixed-term project and decide to employ people on fixed-term contracts. Who will train them? Will they make the grade? Outsourcing takes that uncertainty away. And if the person or company you contract fails to deliver, you don’t have to pay.

We have to mention the elephant in the room here: cheap labor! But provided you’re sure your supply chain partner is using non-exploitative employment practices, why not take advantage of this benefit?

Only Do What You Do Best

If you prefer, we can call this “focusing on your core business,” but it amounts to the same thing. Let’s suppose you’re a manufacturer of ball-bearings. Do you really want to get distracted by IT management? All you want is its benefits! The obvious solution is to outsource.

Be More Competitive

Big companies can afford to have dedicated departments for things like accounting, marketing, HR, and IT. Can yours? But if you outsource, you have all the benefits of a dedicated department – without the overheads.

Risk Mitigation

As soon as you rely on a technology, there’s a risk that it might become outdated. And in today’s world, that can happen really fast. Meanwhile, you’re continuing with business as usual, and the first time you know there’s a risk is when it bites! But if you outsource to a company that specializes in a technology, it will be very aware of developments and changes, and it will know how to keep you ahead of the curve. If it doesn’t, it risks going out of business completely!

Outsourcing, Yes. By Why Offshore Outsourcing?

Now that we’ve looked at the benefits of outsourcing, you may be raring to go. But why would companies outsource services beyond their country’s borders? Here’s why.

Get the Best the World Has to Offer

In a connected world, there’s nothing to stop you from spreading your search for expertise beyond your country’s borders. After all, if you want the best, and can get the best no matter where they may be, why settle for less?

Get Services for Less

Cost of living and what is considered to be an acceptable wage differs from country to country. A lot of businesses are finding that they can access better-qualified talent for less pay. And the companies and employees that take on the work are more than happy with what they earn. Like it or not, one person’s borderline wage is another person’s version of doing well.

Is it exploitative? Not really. Your service provider is glad to get the business, and even though its staff may earn less than what you’d pay in your local country, it’s significantly more than they’d earn locally.

Span Time Zones

You want to offer customer service around the clock.  Or perhaps you have tasks that you want to have completed overnight. Somewhere in the world, it’s a reasonable time of day and not the wee hours of the morning. You can get people who are wide awake and alert to take on a task, and they’ll complete it during the hours when you and your employees would prefer to be sleeping.

Who Uses Offshore Outsourcing and What Functions are Offshored?

Offshoring of production functions has become the norm. Whether it’s the whole product or (more often) a component, Japan outsources to China, the US outsources to South American countries, and so on. We already know that the garment industry outsources much of its production to Asia, choosing to focus on design and marketing.

However, services that can be provided and delivered online provide the richest ground for offshore outsourcing. The impressive roll of companies that are outsourcing to countries like India, Pakistan, Bangladesh, and the Philippines tells its own story. HP, IBM, Intel, Microsoft, Cisco, and Accenture are just a few of the big names that are taking certain functions offshore.

What are the Drawbacks?

Nothing is without its drawbacks. Some companies may find it hard to work with a multicultural team scattered across the globe. Others may find that time zone differences, which can be an advantage in certain scenarios, make real-time cooperation difficult, and there are certainly tax implications for those who want to try offshore outsourcing.

Onboarding, coordination and communication, a problem that may have been raised a few decades ago, can be overcome thanks to technology. Workflow management systems like Tallyfy can be used to communicate and follow up tasks, and it costs next to nothing to send a message halfway around the world.

Is Offshore Outsourcing a Good Thing?

Whether we like it or not, offshore outsourcing is leveling the global playing field. Our customers want the greatest possible value for the lowest possible price, and the very people who are campaigning for more local jobs are probably wearing clothes that were made in China.

The true spirit of capitalism indicates that the most competitive player will win the day. And in a connected world, that applies no matter where that person or company may be located.

Is it a good thing? Most consumers would agree that getting better value for less money is positive – and so would most businesses. We don’t see giants like Microsoft suffering as a result of offshore outsourcing. On the contrary, they benefit and are more competitive. So, why not your company?

About the author - Amit Kothari

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